UK Edition
Chancellor Rishi Sunak is facing calls to allow Covid-19 loans to struggling firms to be converted to grants or for repayments to be linked to profits.
Banks have given companies £22bn in loans under three government-backed coronavirus lending schemes, but there are growing fears that SMEs will be unable to repay or that they simply will not bother because they think the Government will not pursue the debt.
A wave of defaults would pose a political and economic conundrum for Mr Sunak. He has given an 80pc guarantee on loans handed out by banks under the schemes – and 100pc in the case of Bounce Back loans for small firms – leaving the taxpayer on the hook for the losses if SMEs go bust or stop paying.
Stephen Jones, chief executive of bank lobby group UK Finance, has said he fears many firms are already treating the state-backed loans as grants that will never need to be repaid and that banks forced to act as Government debt collectors will end up being seen as “the bad guys”.
“It’s certainly something that the Government is aware of and I think they are now strategising on how to deal with that,” says Ruth Leas, chief executive of Investec Bank in the UK.
Business groups are also keen to ensure the loans are not enforced strictly if the economic crunch becomes a prolonged downturn that pushes thousands of businesses over the edge.
It makes sense for the Government to make clear that it will demand repayment to prevent creating a moral hazard where firms take loans even if they have no intention or ability to ever repay, says Roger Barker, head of corporate governance at the Institute of Directors.
“But if that becomes a macroeconomic problem to the extent that all this debt is actually going to go to be a burden on recovery and block recovery, in a macro sense, then it becomes a bigger issue,” he says.
If that nightmare scenario comes to pass, the Government should not simply enforce the debts, says Barker.
A heavy debt burden would cause difficulty for firms struggling to repay, but it could also become a wider economic problem for the Government to tackle if it prevents firms from investing or means banks are unwilling to lend to small businesses.
All options should be kept open if it turns out that a significant number of firms are unable to repay their government-backed loans in a year’s time, says Mike Cherry, national chairman of the Federation of Small Businesses.
“That includes the option of treating these 100pc government-backed facilities in a manner more akin to student loans, where repayments are stretched over a longer period of time, paused in cases where borrowers cannot afford to repay, or waived entirely under a handful of specified circumstances,” he says.
An alternative to turning the loans into grants would be to allow businesses to convert them into a new kind of debt that links repayments to their financial performance, says Barker.
This could prevent firms that are struggling to stay afloat from being dragged under by fixed repayments on their coronavirus debts.
The Government may need to set up a new vehicle to manage this type of solution because commercial banks do not typically take performance-linked stakes in companies, Barker adds.
Any such bad bank for struggling SMEs would be unlikely to take a direct interest in the running of the firms owing it money. “It just wouldn't be feasible to have a situation where the Government was involved in the governance of small companies with voting at AGMs or [nominating] directors on boards,” he says.
A simpler solution may be to simply write off the bad loans.
The £7bn borrowed under the Coronavirus Business Interruption Loan Scheme (CBILS), for example, is a drop in the ocean relative to other lending schemes, says Alberto Thomas, founder of Fideres, an economics consultancy.
But it may never come to that. Banks have been very careful in choosing which firms to lend to, he notes. “They've been effectively looking only to lend … to companies that can afford paying it back.”